In the wake of the economic reforms of 1992, there was a burst of investment and export, and the economy grew at 6–8 per cent per year for the next four years. In 1997, there was a sharp drop. Thereafter, for about six years, overall economic growth in India fluctuated a lot. The Asian economic recession contributed to the 1997 dip, but short-lived governments formed of unstable coalitions, with the communist parties as partners, contributed to the uncertainty. From 2002–3, the political situation stabilised. The prospects for the world economy improved, and Indian growth bounced back.

Some things changed between the years before the erratic growth phase and the years after. ‘Globalisation’ is a useful expression to summarise the changes, since both foreign trade and foreign investment played a bigger role during the latter years. Globalisation means different things to different people. It is necessary to make its use more precise here. I use ‘globalisation’ to mean the capacity to buy knowledge from the world. In the late nineteenth century, this capacity was created in India via export of textiles and agricultural commodities. In the middle years of the twentieth century and the Nehruvian pursuit of ‘heavy’ industry at any cost, the capacity was impaired. The companies making and selling textiles or agricultural goods, and companies with pre-existing contact with traders abroad, were damaged. From the turn of the twenty-first century, the capacity to buy knowledge abroad was regained by selling labour services and labour-intensive manufactures. This in turn enabled corporate firms to procure the know-how needed to make things for Indian buyers.

Business development is a macroeconomic balancing act because the process in India needs capital, knowledge, and some types of skills still in shortage in the country. Openness to trade and factor movements is an absolute necessity for macroeconomic balance. The balance was restored from the 1990s. The restoration was not all scripted by the state. India was lucky too. The huge fall in communication cost, and the maturing of the information technology revolution made services – traditionally not traded very much – more tradable throughout the world. Indian capital joined the movement as a supplier as well as a consumer. As it did, more money than before flowed from abroad into India, much of it going into the services.

After the British Crown took over administration of the Company's territories in India (1858) the integration of agricultural production with overseas trade was built on a stronger foundation than before, based on modern transport and communication infrastructure, administrative and military integration of the interior with the coast, and a legal framework. The imperial state intervened in the economy mainly by legislating on property and contract. Whereas the aim of property law was to ensure revenue, the aim of the latter was to integrate the Indian economy with the Britain-centred world economy. Standardisation of law was a vital matter for the British Empire, which functioned as a giant customs union with few formal barriers to the movement of goods, capital, and labour between its parts. Standardisation of commercial law was a condition for this setup to work.

Trade volume grew manifold. Businesses specialised into segments. Three nineteenth-century technologies – railways, steamships, and the telegraph – greatly reduced trade costs. Laws helped joint-stock and limited liability to be used more widely. Companies formed in manufacturing, in trading, and in banking. What did these companies do? Most firms, corporate or family run, Indian or European, either traded directly or had an interest tied to trade.

Historians observe that trade was free in this time within the imperial sphere. In fact, free factor movement was a more significant thing than free trade. From about 1860, British capital inflow into India increased, along with migration. It was easy for a company based in India to hire managers and technicians from abroad and sometimes to borrow abroad. The balance of payments bears witness to the fact that businesses were doing this on a large scale. Trade was ordinarily in surplus, and the surplus balanced a net payment for services purchased abroad, both by the government and private enterprise, and transfers made by the British working in India.

As the financial system expanded to be able to fund trade, agricultural business boomed. While corporate banks and big indigenous banking firms financed mainly merchants, some of the money they invested every season filtered through the hands of medium- and small-scale moneylending firms down to the peasant cultivators. A part of the trading and banking profits earned in agricultural trade were re-invested in industry. The main industries, cotton and jute textiles, processed agricultural raw materials. An experience in trading these goods made the move to industry more likely.

The Book

For almost a quarter of a century now, Indian economy has grown at an impressive pace. Private enterprise has led this growth. In the process, Indian companies have had to absorb new technologies and management ideas, reinvent or discard tradition, invite international partners, and become international themselves.

What Indians are now living through is only the latest in a series of episodes that reshaped capitalism in the region. In the 1950s and 1960s, businesses had to adapt to a socialist and protectionist environment. A hundred years before that, businesses responded to the opportunities and risks created by free trade in the British Empire. And before the British Raj came into being, businesses dealt with the collapse of the Mughal Empire in the north, and the rise of the East India Company on the southern coast. Each one of these episodes was organically linked with the others.

This is a business history of India in the last 300 years. The field is rich and well developed. But this book aims to be different in two ways. First, it offers a connected narrative, that is, it links different times, major episodes, Indian history with world history, and economic history with the experience of firms, families, and communities. While writing a connected story, the book also answers the question: Is there something distinctly Indian about Indian business history? Conventional answers to the question consider unique features of Indian society such as caste or India's subordinate position in the British colonial empire in the nineteenth century. Some may even deny the usefulness of the question. This book is different. It does have a leitmotif. And the leitmotif is neither caste nor colonial rule.

A business history is an interesting enterprise because it tells us how capitalists obtain the resources that are essential for capitalism to grow. These resources include capital, technology, trust, managers, organisation, and skills. For most of the years covered in the book, some of these resources were scarce in India. For example, compared with Europe, where financial and commercial capitalism modernised in parallel roughly from the 1600s, trade and industry expanded in nineteenth century India in the presence of limited financial development and high interest rates. Capitalism developed, anomalously, in a region where capital was in short supply.

The temporary collapse of exports during the Great Depression reduced the capacity of firms to hire, borrow, or buy machines abroad. Industrialisation did not stall, for protectionist tariffs were made available from the mid-1920s. Protection was selective, and did not amount to discarding the old trading order. But protectionism established industrialisation as a priority for the state.

The average tariff rate in India had been going up from before the Great Depression (Fig. 6.1). Historians of Indian industrialisation explain the trend in relation to India's changed position within the Empire after World War I. The rulers saw the contribution of Indian industry to the war effort as sufficiently valuable to consider this concession. The move would not hurt British interests too much, for protectionism could be modified to protect the customs union. Imperial goods would still enter India at low tariffs whereas goods from other emerging economies, especially Japan, would face barriers.

State aid was not confined to protection. In fact, in the aftermath of the depression, all types of business had to appeal to the state for help. The formation of elected legislature in the provinces under two constitutional reforms (1919 and 1935) empowered politicians and campaigners to intervene in favour of indigenous capitalists. But although the state was more ready to step in, state aid beyond a moderate level of protection and these isolated interventions, was negligible.

The real significance of state aid during these twenty years does not lie in how much was done. It derives instead from the fact that, for the first time in the history of the Empire, industrialisation and not trade became the cause the state should espouse. Besides, whereas trade and finance were served by small firms, industry was in the hands of large firms with political voice. It was the voice of the big industrialist, and not the traders, moneylenders, and artisans that would prevail in the negotiations that unfolded in these twenty years over the future shape of economic policy in India.

This chapter discusses the origins of protectionism and how it changed capitalism in interwar India.

The Origins of Protection for Industry

Import substituting industrialisation or ISI started in the 1920s due to shifts in British colonial policy.2 The realisation that Indian resources had contributed to the allied war effort led to three commissions of enquiry. The Indian Industrial Commission (1916–18) had a mainly fact-finding mission.

The government introduced certain freedoms in the 1980s. There was not yet a publicly announced reform; the only thing that may explain this was that labour export from India had improved the balance of payments (see Fig. 7.4), the economy was regaining the capacity to import machines again, and this is exactly what was allowed, if on a selective basis. The easing off began with a decision to let the currency float, and depreciate. The government was forced to devalue after the oil crisis; once it was done, it was easy to repeat. During Rajiv Gandhi's Prime Ministership (1985–91), the Textile Policy, which had prevented cotton mills from modernising, was reformed (1985), and investment limits on the so-called ‘monopoly houses’ were relaxed. Price control on some goods including cement was removed, more goods were shifted from import licence list to tariff list, and FERA enforcement relaxed again. Portfolio investment by non-resident Indians was permitted around 1980, and almost immediately, led to a messy takeover case involving UK's Caparo, and India's DCM and Escorts.

These were disjointed steps, and did not add up to much. Politics was torn between reform, or less state intervention than before, and equity, or more state intervention than before. Too many regulatory roadblocks remained for this to be called a liberalisation. Tariff rates were still high. Bankruptcy, labour militancy, and corporate governance crises took extreme forms in traditional businesses. Industrywide strikes in engineering, cotton textiles, and jute caused disruption to the economies of whole regions (Chapter 7). Several business families split up, and some became obscure after doing so.

Still, there were signs of revival in private investment (see also Fig. 8.1). Behind the revival, there were six processes at work. First, the silent softening of the exchange rate encouraged export of garments and leather goods. Although the main beneficiary of the change were small firms, many larger companies set up subsidiaries to take advantage of the export boom. Second, the slight relaxation of import policy encouraged modernisation and investment in new areas. Third, applications to start joint ventures between Indian and foreign partners were reviewed liberally, so that more foreign investment and foreign technology came in even when import licence and foreign investment policy restrictions remained in place. Fourth, the Green Revolution stimulated consumption and encouraged fresh investment in farm equipment and chemical fertilisers.